Not-so-free speech: Insurer’s op-ed fuels regulatory debate

Exclusive analysis for FinReg 21 by Darrell Delamaide

When the chief executive of one of the nation’s best-known insurance companies took to the opinion pages of The New York Times with what looked like an exercise in eating humble pie, he brought to the fore the fierce fight over how this country regulates the insurance industry.

The plea by Allstate CEO Tom Wilson in an op-ed last week to “Regulate Me, Please,” brought a firestorm of retaliation from state insurance commissioners and consumer advocates who accused the writer of cynicism and described his proposal for a federal insurance regulator as a “sheep in wolf’s clothing.”

Because Wilson mentioned in passing that Allstate had played “a small role” in the market for credit default swaps (CDS), his Times piece also brought a demand from New York state insurance superintendent Eric Dinallo for the insurer to detail immediately just where and when it had participated in this market.

The new fracas revives a debate that has been going on for decades – whether there should be a federal charter, and federal regulator, for insurance companies, which now are regulated solely by the states. That debate has been overshadowed recently by the crisis in banking and credit markets, but it is sure to be part of the overall debate on regulatory reform.

The industry has lobbied in favor of a federal charter, complaining that the patchwork of state regulation is inefficient and adds costs that eventually are borne by the consumer. State regulators and most consumer advocates respond that control at the local level provides better protection to consumers and a more responsive bureaucracy.

All this comes out in the current debate over Wilson’s op-ed. The Allstate executive also touched a nerve when talking about fellow insurer American International Group running amok with credit default swaps. He implied this was no surprise since state regulators “lack the expertise to properly oversee rapid innovation or systemic risks.”

Critics were quick to point out that federal regulators in every sphere also failed to keep on top of the risks posed by the derivatives. After all, the New York Federal Reserve Bank under then-president Timothy Geithner never sounded the alarm on the amount of leverage banks under its supervision were building up with CDS and other derivatives.

“What the insurance industry really wants is to escape tough state rules, like those that prohibit excessive profit, overhead and executive salaries in California, or mandate an affordable lifeline auto insurance program for low-income drivers,” Balber wrote. “Federal insurance regulation is the sheep in wolf’s clothing — a surface promise of tough oversight to hide the coming deregulation.”

Dinallo takes issue with Wilson’s assertion that CDS is insurance because for many participants in the market the swaps were purely speculative transactions and did not cover anything they owned, a condition for being defined as insurance.

This is why CDS have not been regulated as insurance, he said. “But one thing should be clear,” Dinallo added in a statement on the issue. “While the credit default swap market is not regulated, insurance company use of credit default swaps is. In New York, no insurance company can use credit default swaps except under very specific and limited ways and only with approval.”

So Dinallo wanted to know from Allstate whether it or any other insurance company it knew of had engaged in “illegal” transactions involving CDS without authorization from state regulators.

Michael McRaith, the insurance commissioner for Illinois, where Allstate is based, challenged Wilson’s sincerity, saying that national insurance companies have long fought state regulation because it diminishes profit.

“Financial institutions pushed for deregulation to promote ‘innovation’ while fundamental consumer protections, like solvency, were dismissed as obstacles to profit,” McRaith wrote to the Times. “With this in mind, the myth-laden pleas of an otherwise prudent Tom Wilson, CEO of Allstate, in search of federal regulatory relief should be viewed cynically.”

McRaith also noted that despite the incompetence of a non-insurance subsidiary of AIG in losing billions for the company with CDS transactions, the insurance units themselves continued to operate soundly under state supervision.

The president of the National Association of Insurance Commissioners, New Hampshire commissioner Roger Sevigny, and the chief executive of the NAIC, Therese Vaughan, also chimed in. “Federal oversight proponents are exploiting consumers’ fears in a self-serving attempt to justify the deregulation of the business of insurance,” they wrote in a letter to the Times. “This is dangerous and threatens consumer confidence in the industry.”

The director of insurance for the Consumer Federation of America, Robert Hunter, himself a former insurance commissioner in Texas, also questioned Wilson’s sincerity in seeking regulation. “Allstate has been very clear that it seeks deregulation by supporting an optional-federal-charter approach that…[would] set up a regulatory arbitrage that would weaken state protections,” Hunter said in his letter to the editor.

Wilson undoubtedly knew the controversy he would generate when he penned his op-ed. And, presuming he can answer Dinallo’s query satisfactorily, he is certain to survive this particular firestorm. After all, he can always plead the First Amendment.

Darrell Delamaide is a veteran financial journalist who has worked for Dow Jones, Bloomberg, Institutional